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The US immigration crackdown: Weighing the economic implications

Juhi Dhawan, PhD, Macro Strategist
February 2025
7 min read
2026-02-28
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

President Trump’s immigration policies hold the potential to meaningfully tighten the US labor market, posing a key risk to the US economy. Large-scale deportations could lead to slower labor force and economic growth and higher inflation, and potentially force the Federal Reserve to maintain tight monetary policy longer.

Here, I look at the recent impact of US immigration, the likely changes under the Trump administration, and the implications for workers, corporate profits, and the economy.

An unsung hero of US exceptionalism

As I wrote previously (read the article here), US immigration surged in recent years. There are different views about the exact size of this post-pandemic wave but considering estimates from the Census Bureau and the Congressional Budget Office, I would put the range of immigrants entering the US since 2021 at 7 – 10 million. The average annual gain in the prior decade was less than a million a year, so these estimates suggest at least a twofold increase in the pace. With this growth in immigration, the number of foreign-born people in the US reached about 15% of the total population, the highest level since the 1890s.

The rise in immigration gave an important and timely boost to the US labor supply, helping to cool the labor market and rein in inflation by slowing wage gains. It spurred average annual labor force growth of 1.8% in 2022 and 2023, which contributed to stronger economic growth and allowed disinflation to take hold.

However, this economic blessing proved to be a political nightmare for the Biden administration. Much of the surge in immigration came from a rise in undocumented entrants, who strained the finances of impacted cities and states and sharply increased the labor supply at the lowest wage levels, eating into the bargaining power of incumbent workers via increased competition.

Biden responded with a more restrictive immigration policy, and while it didn’t help him in the election, it did slow the flow of immigrants. It’s still too early to say with precision when this slowdown will show up in labor market data (changes in immigration rates impact population data quickly but shift the labor supply with more of a lag), but I expect to see labor force growth slow materially over the course of the year. (Bear in mind that the labor market participation rate of the foreign-born population is persistently higher than that of the native-born population.)

What comes next under Trump?

Now, the question is how far Trump will go with his own immigration policies, which could greatly hasten labor market tightening. Labor force participation rates have already declined somewhat, perhaps reflecting a decision by some workers to lie low amid the threat of increased government scrutiny. In addition, migrant encounters with the US Border Patrol at the southwest US border have fallen sharply. 

With roughly 11 – 14 million undocumented immigrants in the US (about 5% – 7% of the labor force), it would be a significant logistical and resource challenge for the Trump administration to quickly follow through on the promised large-scale deportations.1 Still, of the 7 – 10 million recent entrants and some earlier undocumented immigrants, it’s estimated that as many as three million could end up leaving the US over the next few years. Many entered on temporary parole (e.g., through humanitarian parole programs that applied to certain countries and are now under fire from the new administration) or on condition of a “notice to appear” at an immigration court. History suggests more than half of these asylum seekers will be denied in court (though backlogs can create a wait of as long as six years for a hearing) and the Trump administration is likely to take a tough stance on those who are denied.

As he did in 2019, Trump has declared an emergency at the US/Mexico border. He has also directed the Department of Homeland Security to expand the use of so-called expedited deportations and reinstated the “Remain in Mexico” policy, which encourages those seeking asylum to stay in Mexico until their case is adjudicated (Mexico would have to agree). Not all of Trump’s policies in such areas succeeded in his first term, and it is likely that courts will hold up some of the orders he’s issued in the early days of this second term. Still, there is little doubt the change in administration will impede immigration.

Even in the skilled immigration space, which has some supporters within the Trump administration, students and other immigrants from certain countries (e.g., China) may face greater scrutiny, at least in the early going (similar policies were contested in Trump’s first term). This may mean that companies seeking to address a shortage in skilled labor will be likely to increase the use of offshoring, which could spill over into slower US growth.

What the new policies could mean for the economy and profits

My baseline assumption is that a tough crackdown on humanitarian parole and other programs will reduce the number of immigrants by as many as 75,000 per month. I expect much of this change to come over the next two to three years as those seeking asylum appear in front of courts and, if denied, are asked to leave by the Trump administration. 

Among the implications I foresee is a change in the breakeven level of employment gains needed to keep the unemployment rate steady: The surge in immigration effectively allowed the US to grow employment by about 200,000 per month over the last couple of years, without driving the unemployment rate down to a level that would spark higher inflation. As immigration declines, the economy will need to slow to a point where employment gains don’t exceed 100,000 a month in order to keep the unemployment rate steady. 

If my assumptions are correct, I would expect a tight labor market to push up real wages for existing workers and encourage automation as companies are forced to innovate and scale operations to save on labor costs. Sudden shifts in labor supply may also create disruptive risks for the economy. From an industry standpoint, agriculture, construction, food processing, home health care, and leisure activities are some of the areas that rely heavily on undocumented immigrants and could see renewed wage pressures (Figure 1 highlights some of the key occupational categories). The housing market may also feel the impact, as the rental vacancy rate could rise somewhat as people leave the country. Among the states likely to be impacted most by enforcement actions are California, Texas, Florida, New Jersey, New York, and Illinois. 

Figure 1

Could ex-US equities begin to outperform US equities?

An important question from the vantage point of workers is whether the labor share of income (the percentage of a country’s economic output that goes to workers) will begin to bounce back from a decades-long decline because of these changes (Figure 2). I am assuming it will later in 2025 and going into 2026, but the pace of improvement will depend on many policy decisions still to come from the new administration. The flip side of this possible improvement in labor share of income would be profit growth that relies more on top-line growth and less on profit margins, a meaningful departure from the current regime and a sign of an advancing business expansion.

Figure 2

Could ex-US equities begin to outperform US equities?

Finally, it’s worth emphasizing the importance of immigration to the US labor force growth given the country’s aging demographics (which I wrote about here). US population growth was just 0.1% in 2020 but then surged to 1% in 2024, with 80% of the gain coming from immigration. Current projections suggest population growth would slow to about 0.3% – 0.4% per year by 2030, with immigration accounting for two-thirds of the gain. In addition, US demographic projections show that labor force growth will be negative for those with less than a high school education. This means targeted, timely immigration policies that recognize the need for labor will be critical for US economic growth. Medium term, it means that the sustainable real interest rate will move lower again as the surge in the labor force recedes.

The ability and willingness of the US to absorb immigrants has long been a competitive economic advantage. While recent immigration policy may have posed challenges for the country, finding a sound framework for legal immigration will be critical going forward.

1Sources: Pew Research Center, The Burning Glass Institute

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